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Enjoy the benefits of Employment Ownership Trusts

Employment Ownership Trusts can give business owners looking for an exit strategy an opportunity to sell their shares to an employee-owned trust free from Capital Gains Tax whilst rewarding their team.

How do EOTs work?

Employees do not directly own shares, as they are transferred to a trust that later benefits them through the payment of dividends or bonuses. This is similar to existing cooperative business models, like John Lewis.

To create an EOT, existing shareholder(s) must sell at least 51% of the share capital of the company to the trust.

It is often the case that some of the consideration payable by the trust is contributed by the company. However, it isn’t uncommon for some external funding to be used alongside this.

If some of the consideration is deferred, then this is usually paid out of the future profits of the company.

What are the benefits?

Employees in an EOT have a stake in the company but do not become owners and do not have control – that remains with the board of directors.

This new relationship encourages all involved to drive the company forward, increasing productivity and job satisfaction as well as the financial rewards.

There are several other benefits to consider, including:

  • The disposals of shares via EOTs are exempt from Capital Gains Tax allowing the owners to get the most value from what they have invested in the business.
  • Divestiture of these shares will also be exempt from any potential Inheritance Tax bill, ensuring more wealth is passed to beneficiaries.
  • It encourages owners to develop a corporate structure that encompasses employee ownership.
  • Tax-free bonuses of up to £3,600 to employees are available.
  • A Corporation Tax deduction for the value of the bonuses will be available.
  • Employees have a say in how the company is run in future.

If you want to learn more about the potential tax savings offered by EOTs, please contact us.